Many buy-side market participants are in the process of grappling with issues related to the amendment of their derivatives trading documentation in order to account for new U.S. margin requirements that will apply to non-cleared swaps beginning on March 1, 2017 (the “Implementation Date”). But, in our experience, a large number of market participants have not yet begun to consider how they are going to implement the required changes despite the fact that the Implementation Date is only a little over three months away. In this posting, we offer a few thoughts on a protocol that was recently published by the International Swaps and Derivatives Association (“ISDA”) to facilitate amendments to ISDA Master Agreements and related Credit Support Annexes that account for the new non-cleared swap margin rules recently enacted by U.S. regulators.

As alluded to in the introduction to this posting, ISDA has published a protocol (the ISDA 2016 Variation Margin Protocol) that is designed to facilitate amendments to the ISDA Master Agreement and related Credit Support Annex (“CSA”) that account for the new non-cleared swap margin rules. The protocol is “jurisdictionally modular,” in so far as it can be used to account for margin rules that will be going into effect in the U.S., as well as in other jurisdictions.

As of the date of this posting, the list of adhering parties publicly available at ISDA’s website shows that less than 80 market participants have adhered to this ISDA protocol. Given the very large number of market participants, this is a relatively low level of adherence, although that may change as the Implementation Date approaches. In addition to the relatively small number of adhering parties, it is worth noting that very fewbuy-side market participants have adhered to the protocol.

What could be some of the reasons for this relatively low level of participation by buy-side firms?

In the first instance, as noted in the introduction to this posting, many firms have only recently begun to grapple with these documentation issues and the new margin rules. This means that some firms are in a “wait-and-see” mode or, perhaps more accurately, a “learn-&-wait-and-see” mode. Also, on the swap dealers’ side of the market, a significant amount of energy and attention was focused on implementing new margin rules that went into effect on September 1, 2017 and applied to inter-dealer trades. As a result, some of the swap dealers have only recently begun to reach out to their customers with requests to amend existing CSAs. In addition, some buy-side firms seem to have a strong preference to negotiate bi-lateral amendments to their existing CSAs, rather than relying on the terms of the protocol. In this regard, it is our understanding that some buy-side industry trade organizations have raised issues regarding the ISDA 2016 VM protocol. Regardless of the reasons – which are no doubt more complicated and numerous than the few mentioned in this posting – the required CSA amendments will need to be in place by the Implementation Date. As the saying goes, “it is not a matter of if but when,” and in this case that when is a known date – March 1, 2017.

Given that the new margin rules will go into effect in a little over three months, we encourage all market participants to endeavor to resolve their trading documentation issues in relatively short order – time marches on and waits for no one and…etc., etc., etc.,…